Theoretical Aspects of International Trade

The essence of the principle put forward by Heckscher- Ohlin is that a country will export those

commodities that are intensive (capital-intensive; labour-intensive) in the factor in which it is most

well endowed. The law of comparative advantage (Ricardo, D.) had been established by economists

as an explanation for the existence and pattern of international trade based on the relative opportunity-

cost advantages between different countries producing different commodities.

Due to Heckscher—Ohlin principle opportunity cost acquires particular importance. By it we

understand the value of that which must be given up to acquire or achieve something. Economists

attempt to take a comprehensive view of the cost of an activity. If a firm invests undistributed

profits to spend ￡1,000 on new machinery which requires less electricity to run than the equipment

it replaces, the cost of that machinery is not the outlay of ￡1,000 alone: what could be earned from

the best alternative use of the money also has to be taken into account. If, for example, the firm is

paying 12 per cent interest on an overdraft and the saving in electricity is less than ￡120 a year, it

would be better for the firm to pay off its overdraft than to invest in the new machinery. If a selfemployed

person makes a profit of ￡8,000 a year but pays himself no wage, he needs to consider the

alternative use to which his time could be put. He might, for example, be able to earn ￡10,000 a

year working for someone else: this is the opportunity cost of his time. Accounting costs, as in these

examples, normally allow only for cash outlays, but cash outlays will only approximate to opportunity

costs where competition ensures that the prices of all factors of production are equal to those

for their best alternative use (Wieser, F. von). (Under the assumptions of perfect competition, the

self-employed person would be aware that he could earn more in employment and, since we assume

profit maximization, he would do so.) Economists also distinguish between private costs and

social costs and costs in real terms and money terms.

However, the economists interpreted the law of D. Ricardo in different ways. The law says nothing

about why or how a comparative advantage exists. The Heckscher—Ohlin principle states that

advantage arises from the different relative factor endowments of the countries trading. The principle

was first put forward by Eli F. Heckscher (1879—1952) in an article published in 1919 and

reprinted in Readings in the Theory of International Trade (1949). It was refined by Ohlin in his

Interregional and International Trade (1933). The principle has been developed further.